Low-fee track­ers squeeze rev­enue

The Star Early Edition - - BUSINESS REPORT INTERNATIONAL - Sab­rina Willmer and Charles Stein

BLACK­ROCK Inc, the world’s largest as­set man­ager, is haul­ing in in­vestor cash at a record rate.

There is one issue: the money is mov­ing into low-fee prod­ucts which track in­dexes, pinch­ing rev­enue.

Black­Rock man­aged to boost prof­its in the fourth quar­ter, though rev­enue barely grew.

The firm was a prime ben­e­fi­ciary of a record year in ex­change-traded funds.

Black­Rock at­tracted $140 bil­lion to its iShares busi­ness last year, in­clud­ing $60bn in fixed-in­come ETFs. Van­guard Group, the sec­ond big­gest player in the ETF busi­ness, gath­ered $93bn.

But as­set man­agers are also in a race to the bot­tom on fees to win in­vestors. In De­cem­ber, Black­Rock trimmed ex­penses on six smart beta ETFs, sig­nalling that the price war was mov­ing beyond plain vanilla prod­ucts.

“In 2016 it is fair to say that across all in­vestor types there was a move­ment more to­wards pas­sive strate­gies,” chief ex­ec­u­tive Lau­rence Fink said in an in­ter­view on Fri­day af­ter the earn­ings were re­leased. When I am able to in­crease mar­gins and mar­ket share through price cuts, I am go­ing to do that. The key el­e­ment is scale.”


Black­Rock ex­panded its op­er­at­ing mar­gin from a year ear­lier, also by keep­ing com­pany costs down. The shares gained 1.6 per­cent to $384.28 dur­ing morn­ing trade in New York on Fri­day. The com­pany’s fourth-quar­ter earn­ings of $5.14 a share ex­ceeded es­ti­mates. Rev­enue rose 1 per­cent to $2.89bn, fall­ing short of an­a­lyst es­ti­mates of $2.93bn.

Lower per­for­mance fees and a stronger dol­lar con­trib­uted to the mod­est rev­enue growth.

In­vestors poured money into US stock ETFs af­ter the elec­tion of Don­ald Trump as they ex­pected that­tax cuts, spend­ing on in­fra­struc­ture and lighter reg­u­la­tion would lead to a stronger econ­omy.

But as­set man­agers are be­ing stung be­cause the cheap­est ETFs are at­tract­ing in­vestors. Over half of the ETF in­flows are go­ing to prod­ucts with an av­er­age fee of 0.09 per­cent or less, ac­cord­ing to an anal­y­sis from Bloomberg In­tel­li­gence.

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